Social games — a subset of the gaming industry that offers simple games that run across various social networks — today received what is the equivalent of a Good Housekeeping seal of approval from Electronic Arts, the $4.2 billion-a-year gaming giant. EA (s ERTS) today snapped up Playfish, a London-based company which is well-known for social gaming titles such as Restaurant City and Pet Society, for $400 million. Here is my take on the winners and losers in this deal, including its ramifications for the overall industry.
Electronic Hurts: Electronics Arts is paying $300 million ($275 million in cash and $25 million in equity retention money) and another $100 million in earn outs for Playfish. EA is paying top dollar because its internal social gaming efforts have been a flop. This past summer, Electronic Arts was hesitating to offer $200 million for Playfish. I would guess EA’s internal social gaming efforts (or lack thereof) were the reason why it almost doubled the money.
Electronic Arts CEO John Riccitiello clearly understands the changing distribution and monetization dynamics of the game business, but he is on the wrong side of history. The company today reported a big loss — $391 million on sales of $788 million — and cut nearly 1,500 employees. (Related post: “Game Business and Its Crisis of attention“)
EA is way too dependent on the console market and has been slow to embrace the shift to web-based gaming. Despite buying Playfish, Electronic Arts will continue to see its revenue come under pressure. Overall trends are against EA, as we have noted previously. EA will find itself on the treadmill of buying companies for growth and diversification into new markets — never an easy task. Verdict: Loser.
Game on: Playfish’s management, including co-founders Kristian Segerstråle, Shukri Shammas, Sami Lababidi, and Sebastien de Halleux, are the biggest winners in this deal. They kept a low profile, stayed far away from the hype and fury of Silicon Valley, and by building a business based on solid fundamentals, they were able to form a respectable company — rumored to have revenue between $40 million and $50 million. The company says it is profitable and has enough cash on hand to remain an ongoing business. Verdict: Winner
Index-ed: The biggest winner in this deal is Index Ventures, the London-based investment house headed by Danny Rimer. The deal validates the firm’s consistent backing of virtual goods and virtual world/gaming companies. Most importantly, the deal shifts focus away from the firm’s very public humiliation. The fund had to bow out of the Skype buyout, even though it was the original instigator. As they say, in the VC world, you are as good (or bad) as your last exit. Verdict: Winner
Game Side Story: The biggest winner in this deal will be the entire social gaming sector. “EA’s acquisition validates this space, and shows how big this is about to become. Now, this is going to grow on a really massive scale,” de Halleux, Playfish’s COO, told Inside Social Games. Thanks to EA’s bet, most of the second-tier game publishers will jump into the fray, picking up all the good companies. Activision/Blizzard is looking at the social gaming space and is a likely buyer. Others like THQ and Ubisoft need a play of their own and might loosen their purse strings. That is good news for the likes of Playdom and Social Gaming Network. I am actually surprised that Disney and other large media companies have been playing it cool and not buying in the space. Verdict: Winner
Zynga-ed: Over the past few weeks, TechCrunch has been running a much-needed campaign against the crummy offers in games that are mere lures to get virtual points. The issue is impacting some social gaming companies more than others, including Zynga, which until recently has been a media darling. It’s in the eye of the hurricane, but then it’s the biggest (and most aggressive) social gaming company. I could call it a loser for now, but a long-term winner.
Think of it this way: If Zynga cleaned up its act, walked the thin and narrow, and in the process lost, say, a third of its revenue, it would still be making somewhere between $175 million and $200 million a year. Given that Playfish was acquired for 10 times its revenue, Zynga could get between $1.75 billion and $2 billion. That’s a big number, and Zynga will be hard-pressed to find a buyer. So it has to go for an initial public offering — and that can take some time. Verdict: Loser